The New Zealand Gas Market - an Overview

1. The New Zealand Gas Market - an Overview Presentation to the NZ Petroleum Conference March 2004

2. Today’s talk • Industry’s key challenge • Supply and demand outlook • What is at stake for gas industry • Customer implications • Petrochemicals • Power generation • Industrial • Residential & commercial • Possible solutions • Conclusions

3. Industry’s key challenge

4. Kupe 300 Pohokura 250 Maui Mangahewa 200 Kapuni McKee PJ/annum 150 TAW Rimu/Kauri 100 Minor Fields Demand (Full Petrochemical 50 Capacity) Capacity) Demand (excl Petrochemical) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Supply outlook is uncertain Demand (Limited Petrochemical

5. Suppliers and customers both lose from uncertainty • Vicious circle can develop: • limited upstream investment creates supply uncertainty • downstream users switch away from gas due to supply uncertainty • dwindling market opportunity limits upstream investment Supply uncertainty Demand uncertainty

6. Entire industry has large direct stake in the outcome Indicative estimate ? ?

7. Customer implications

8. Petrochemical sector • Petrochemical sector was 42% of usage in 2002 - large demand source has been important: • baseload revenue can anchor new developments • some ability to swing (due to traded nature of final product) • But: • final product prices can be very volatile • NZ has moved from being a low cost producer to being a relatively high cost producer • NZ capacity is being replaced/displaced by new low cost capacity in Chile and Trinidad (source : Methanex) • Likely that NZ will become marginal producer, dependent on local gas price and world prices for product • Until it is retired, sunk cost plant could provide a market for a future large gas discovery

9. Power generation sector • Power generation accounted for 33% of usage in 2002 • Gas fired plant has been fastest growing source of new generation - 15% p.a., compared with 2.5% p.a. for all generation • Gas also plays an important role as a swing fuel to meet seasonal and inter-year variations

10. Power generation - future investment • Gas is still a good option for new electricity generation but needs to be price competitive • Carbon charge has major impact on relative costs of different generation sources Sources : Infratil Update - September 2003

11. Power generation - flexibility requirements Budgeted Gas Use for Thermal Generation PJ/month Some flexibility is important :- • Contracts with rigid “take” obligations at times of high hydro flows are costly to generators and could result in gas being burned while hydro spills

12. Industrial sector • Industrial usage accounted for 10% of demand in 2002 • For many industrial customers the economics of gas usage are now becoming marginal *Contact Energy estimates for typical Hawkes Bay customer

13. Industrial sector - future trends • Industrial market requires:- • assurance about future fuel supplies for future investment • competitive pricing compared to other fuels • some flexibility of take in contracts • There are already signs that some industrials are weighing up price and security of supply issues and contemplating a move away from gas eg Fonterra announcement about building a coal fired energy centre at Whareroa.

14. Residential sector • Total of 220,000 customers • Using over 6PJ of gas per year • Large number of retailers given number of customers *As detailed in Wanganui Gas, Genesis and Contact latest annual reports

15. Residential sector - untapped potential • Limited penetration, large number of houses on streets that contain gas mains though not connected to gas • Economics should favour gas for water and space heating due to thermal efficiency gains

16. Residential sector - why such limited penetration? • Connection process is not customer friendly • no defined service for time to connect (can wait 3 months) • no defined price • Historically appliances have been expensive • Limited marketing • Retailers have little incentive to connect new customers; low margins and customers can switch • Network companies appear more interested in returns from existing customers than investing in growth • Poor economics for customer • Gas no longer provides significant cost savings over electricity, especially given the high cost for connection. • LPG solutions are increasingly competing against reticulated gas • Residential sector has unrealised potential but it will require changes to access full growth

17. Future effort

18. Future effort • Upstream • ensure existing sources of gas are brought to market swiftly • provide flexibility where customers value it • Pipelines • consider present revenue vs future revenue tradeoffs • ensure least cost operation • Power generation • provide revenue underpinning to encourage development of new gas sources • be prepared with alternative fuel sources where appropriate

19. Future effort • Industrial sector • clearly define the value/reliability requirements • forward contract where possible to manage risk and underpin development • Residential sector • be aware that long term gas supply for this sector has very high level of assurance • Policy makers • remove impediments to new development (e.g. carbon tax uncertainty) • foster upstream competition (e.g. open access regime for transmission)

20. Conclusions • NZ has a large market for gas provided it is priced competitively • Continued presence of Methanex ensures that there is always a ready outlet for a large gas discovery • Electricity generation will continue to offer an attractive market for gas but some flexibility in contract terms is required • Networks will need to reconsider pricing issues if residential market is to reach full potential • Industrial market is likely to be relatively fragile and will be focussed on security of supply and price issues